SEE: REITs have had a good run, yield compression may have come to an end
Leow believes that foreign exchange dynamics will stay favourable and dominant in the movement of the long-term tenor SGS instruments. This is as the Singapore Dollar (SGD) tends to hold up relatively well in periods of economic uncertainty, thereby putting downward pressure on the SGD vis-à-vis US Dollar rates across all tenors. For now, Leow says that events such as the dissemination of coronavirus vaccines around the world could narrow the SGS-US Treasury yield spreads. However, hurdles in achieving this come from the 10 year and 15 year auctions which are scheduled for March and April, he adds. By contrast, Leow says that the front of the SGS curve – which moves out to the 5-year tenor – has stayed attractive, thereby allowing USD-based investors to “get additional pickup from an after-swap perspective”. This in turn commands a consistent premium over the US Treasury yield.
For more stories about where the money flows, click here for our Capital section
“This is largely due to the relative liquidity differences between SGD and USD,” Leow explains. While the US Federal reserve is running Quantitative Easing, it has opted not to sterilize the resultant increase in liquidity.